Project Merlin under fire as banks reveal they turn down 40% of small business loan applications

The majority of small firms which applied for an overdraft for the first time last year were rejected, a report revealed yesterday.

The report commissioned by the banks themselves also found that 40 per cent of cash-strapped firms which applied for a loan for the first time were turned down.

The figures make a mockery of the Government’s attempt to get banks to increase their lending to small firms last year, which was codenamed Project Merlin.

The report reveals that small firms in Britain remain starved of cash, with many struggling to survive

The report reveals that small firms in Britain remain starved of cash, with many struggling to survive.

And even for those not close to collapse, the lack of cash means they cannot invest in their business or hire new staff.

More than 20 months after this newspaper launched its Make The Banks Lend campaign, to highlight the desperate plight of many small firms, researchers quizzed 15,000 small firms on their relationships with banks since the recession.

Of the small firms which had applied for an overdraft for the first time, 55 per cent got ‘no facility’. A small firm is classified as a company employing fewer than 250 people.

Less than a third – around 30 per cent – were ‘offered what they wanted and took it’, according to the 185-page report, called the SME Finance Monitor.

There is a worrying difference between the failure rate of small firms applying for a loan for the first time, and those renewing or increasing an existing overdraft.

Of those who wanted to renew their overdraft, just 3 per cent were rejected.

To make matters worse, banks are also rejecting small firms applying for a loan for the first time.

The report said 43 per cent of ‘first-timers’ were turned down for a loan, compared with only 12 per cent of small firms renewing their loans.

Chuka Umunna, Labour's shadow business secretary, said that the report's findings were 'worrying'

Chuka Umunna, Labour’s shadow business secretary, said that the report’s findings were ‘worrying’.

He said: ‘At a time when we need more people to be starting and growing businesses, it is worrying that more than half of firms applying for an overdraft for the first time last year were rejected.

‘Businesses are struggling to get the finance they need and many are being discouraged from applying in the first place.

‘This is something that both ministers and the banks need to address urgently.’

Overall, Project Merlin’s gross lending target to small firms was £76billion, but the banks managed to hand out only £74.9billion, a crippling shortfall of £1.1billion.

John Walker, national chairman of the Federation of Small Businesses, said: ‘More than a third of our members feel that they have missed their growth opportunities and fear being uncompetitive as a result of not being able to access finance.’

A spokesman for the British Bankers’ Association said: ‘The overwhelming number of small and medium-sized businesses looking for credit were successful in raising finance from their banks.’

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Project Merlin under fire as banks reveal they turn down 40% of small business overdraft applications